Imagine a situation where after hiring a Tata Indica car, you are asked to pay the rental of a Mercedes, or vice versa. This is exactly what has happened when the Union government changed rules last year for setting tariffs at 11 of the 12 ports it owns.
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The port privatization policy the government followed so far required a terminal operator—selected through competitive bidding—to share annual gross revenues with the state-run port. The bidder quoting the highest revenue share percentage got the contract. The tariffs for the services provided at the terminal were fixed subsequently with the approval of the tariff regulator. These tariffs were fixed by adding 16% to actual costs. The new rules require tariffs to be set generally for the port as a whole on a normative basis and not with reference to a particular project. Under the normative approach, upfront tariffs will be worked out on the basis of certain defined criteria and assumptions on capital costs and operating expenses that are unrelated to actual costs.
Such upfront tariffs are fixed on normative basis (factoring in 16% return on capital) ahead of inviting bids for new cargo handling projects. The bidder quoting the highest revenue share would clinch the deal.
The upfront tariff guidelines say the tariff once set would apply to all terminals that are auctioned subsequently in the same port during the next five years for handling identical commodities or providing similar services. Such tariffs would remain valid for the entire duration of the contract, typically 30 years. The tariffs, though, would rise every year to account for rising prices because it is indexed to the Wholesale Price Index to the extent of 60%.
It so happened that the Jawaharlal Nehru (JN) Port had to first set upfront tariff for developing a 330m (half the normal length of 650-700m) container terminal, the port’s fourth, ahead of inviting price quotation from shortlisted bidders. Another bigger terminal with a berth length of 2,000m is also lined up for development in the next two-three years.
The authorities of India’s busiest container port were in a dilemma. Should they use the parameters and costs of a 330m terminal, estimated to cost Rs600 crore, to work out the tariffs that will be applicable to similar facilities to be developed at the port in the next five years? Or, should it calculate the tariffs on the basis of a 2,000m terminal?
Realizing that setting upfront tariffs using any of the two terminals would carry an inherent bias towards one of the projects, the port hit upon an innovative idea. It decided to set upfront tariffs on the basis of a so-called representative terminal (hypothetical) with a berth length of 1,000m.
In March, the Tariff Authority for Major Ports (TAMP), which regulates rates for 11 state-owned ports, cleared the proposal by fixing an upfront tariff of Rs3,434 for handling a loaded standard container at the new 330m terminal, on the basis of a representative terminal of 1,000m.
This has not solved the bias in favour of the two projects. The user tariff of Rs3,434 is considered high, taking into account the investment and expenses for developing and running a container terminal of 330m. According to one calculation, the tariffs should be only around Rs2,078 for a loaded container. The tariff is high compared to the tariff prevailing not only in that port where three separate terminals are operating, but in other state-run ports as well.
A higher tariff would hit the ability of the new terminal to attract cargo in a competitive environment. Higher handling costs of containers will also hurt competitiveness of Indian goods in the global market.
The new rules have put the JN Port in a bind. The next terminal, which will be bigger in terms of investment, construction costs, size and design, will have to content with this user tariff for a project costing around Rs6,700 crore.
TAMP has cleared the proposal though many potential port operators and user groups wanted separate tariffs for the two terminals taking into account a realistic assessment of capital expenditure and operational costs.
A single tariff for all terminals within a port is not feasible as the project parameters differ for different terminals. The upfront tariff setting exercise defies reason.
P. Manoj is Mint’s resident shipping expert and writes on issues related to shipping and logistics every other Friday.
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